Increasing worries about a recession and continued bad news on the earnings front have put global stocks on the defensive. This morning, GE reported that profits in Q1 dropped 6%, prompting them to revise their earnings forecast for the remainder of the year downward.

GE is one of the bluest of the blue chips; the second largest corporation in the US (market cap) and the broad scope of its operations makes it a bellwether for the US economy as a whole. Today's news is just further confirmation of the recession and suggests that losses already seen in other sectors may now be hitting the broader market.

GE's CEO said in a statement that, "Demand for our global infrastructure business remained strong, but our financial services businesses were challenged by a slowing U.S. economy and difficult capital markets."

Sectors like retail, housing, banking and brokerage are off 30% or more from July of last year when the subprime crisis began. So far, the broader indexes have held up fairly well. From 02-Jul-07 through Thursday's close, the S&P500 is down 10.5% and the NASDAQ is down 10.7%. Meanwhile, the DJIA has only lost 7% of its value during that same period and is off just 12% from its record high of 14,279.96 (11-Oct-07).

I think the resiliency of the Dow in particular can be explained by blue chip buying at the expense of the aforementioned specific sectors that have born the brunt of the subprime, credit and liquidity crises. Bailing out of stressed sectors and buying stalwart companies such as GE may have made sense earlier in the crises, but such reallocation may not be able to prop up the broader indexes for much longer.

As stated in Thursday's commentary, evidence is growing that we may be on the verge of a protracted bear market for equities. I had a drink last night with a friend that works on the trading desk of a major global bank, one that has survived the recent turmoil virtually unscathed as a result of very limited exposure to subprime debt. He's one of the sharpest guys I know and he was bemoaning all the compliance hoops he has to jump through to sell his stock holdings.

Upon further questioning, he divulged that he has been gradually liquidating his portfolio over the last couple weeks in anticipation of an extended downturn in the stock market. I then asked him what he was planning to do with the cash. His bank apparently pays one of the highest interest rates on money market funds, but he concurred that given the rate of inflation he would be taking a loss in real terms for the period he is in cash.

The consumer price index (CPI) is presently running just over 4% y/y. However, many would argue that the methodology for deriving CPI grossly underestimates actual inflation. Several alternate sources for CPI suggest the real rate of inflation is somewhere in the 8% - 10% range.

He again concurred that US treasuries, with yields on 3-month T-bills around 1.25% and 10-year notes just over 3.5%, weren't a particularly attractive option either. In my head I'm thinking, okay Jeff you're a smart guy, where do you put your money then? Wait for it...wait for it... "Maybe I should buy some gold." YES! That wasn't so hard was it?

The fact that he of all people sees the logic in using gold as a store of wealth in these troubling economic times, with no prompting from me - aside from the fact that he does know what I do for a living - is certainly encouraging. I think as more and more money comes out of the stock market in the weeks and months ahead, more and more investors are going to be drawing the same conclusion.

Systemic risks to the US and global banking and financial systems, the high rate of inflation (by any measure), the threat of recession, and substantial debasement to the dollar in the form of massive liquidity injections and sharp cuts to US interest rates are all reasons to protect oneself with physical gold. Physical gold is an extremely liquid asset and one that is not simultaneously someone else's liability. No counterparty risk.

Factor in the very favorable supply/demand dynamics for gold; highlighted in Mike Kosares' excellent article Golden Gut Check and you have the makings of long and healthy bull trend in the yellow metal.

I think we can now also start considering the implications of a massive reallocation of funds out of the stock market. Sharp drops in certain sectors are undermining the broader indexes and it may just be a matter of time before supports give way and a bear trend commences.

Gold has been averaging about +15% per year since the start of the new millennium, +24% per year over the last 3 years, and +31% last year. That makes at least a partial allocation to the yellow metal pretty attractive. Now is the time to implement or bolster your asset preservation strategy with gold.

Gold Market Movers:

US Michigan sentiment plummeted to 63.2 in Apr, much worse than the market was expecting, versus 69.5.

US export price index for Mar up sharply 1.5%, versus a revised 1.1% in Feb.

G7 meeting of finance ministers and central bankers begins today in Washington, DC.

IMF World Bank meeting over the weekend in Washington, DC.

US import price index for Mar surges to 2.8%, versus 0.2% in Feb.

GE posts lower 1Q profit, cuts outlook

G7 Preview: Finance chiefs to address global financial turmoil

Dollar slips before key G7 finance meeting

Opinions expressed in commentary on the USAGOLD.com website do not constitute an offer to buy or sell, or the solicitation of an offer to buy or sell any precious metals product, nor should they be viewed in any way as investment advice or advice to buy, sell or hold. Centennial Precious Metals, Inc. recommends the purchase of physical precious metals for asset preservation purposes, not speculation. Utilization of these opinions for speculative purposes is neither suggested nor advised. Commentary is strictly for educational purposes, and as such USAGOLD - Centennial Precious Metals does not warrant or guarantee the accuracy, timeliness or completeness of the information found here.

Pete Grant is the Senior Metals Analyst and an Account Executive with USAGOLD - Centennial Precious Metals. He has spent the majority of his career as a global markets analyst. He began trading IMM currency futures at the Chicago Mercantile Exchange in the mid-1980's. In 1988 Mr. Grant joined MMS International as a foreign exchange market analyst. MMS was acquired by Standard & Poor's a short time later. Pete spent twelve years with S&P - MMS, where he became the Senior Managing FX Strategist. As a manager of the award-winning Currency Market Insight product, he was responsible for the daily real-time forecasting of the world's major and emerging currency pairs, along with the precious metals, to a global institutional audience. Pete was consistently recognized for providing invaluable services to his clients in the areas of custom trading strategies and risk assessment. The financial press frequently reported his personal market insights, risk evaluations and forecasts. Prior to joining USAGOLD, Mr. Grant served as VP of Operations and Chief Metals Trader for a Denver based investment management firm.

-- Posted Friday, 11 April 2008 | Digg This Article